Painful energy reform to tempt a PM

Will rising power prices put enough pressure on governments to go the last hard yards of electricity reform? Maybe.

The federal government’s draft energy white paper warns that retail electricity prices, which have risen 40 per cent in the past three years, are likely to be the subject of “further sustained increases" over the rest of this decade. It cites estimates of $240 billion to be spent on new generation, transmission and distribution assets over the next two decades.

In theory, if the investment is warranted, there should be no political consequences.

But Prime Minister
Julia Gillard
knows that she and her carbon tax will end up with a good share of the blame. It is in Gillard’s interests to keep non-carbon price related electricity price increases to a minimum.

The draft white paper sets out the opportunities to do just that.

The first is the review of the investment plan, which has been ordered by the Gillard government. The industry argues that high levels of investment in transmission and suburban distribution are needed to replace ageing assets and to keep up with growth in demand, especially in peak periods, while providing better standards of reliability.

But economist
Ross Garnaut
argues the investments have been stimulated by a regulatory regime that “provides excessive incentives for investment whether or not it is wanted by consumers".

Garnaut questions both the need for higher reliability standards (which, he points out, can undermine the national market) and the need to urgently replace infrastructure built up in the 1960s and ’70s. He also points out that other countries provide incentives to reduce energy demand at the peaks. The answer in Australia, he says, is to reform retail electricity pricing to curb the growth of peak demand.

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As the white paper explains, consumers’ use of energy-intensive appliances has increased sharply, and so have the peaks in electricity demand. For example, between 1998 and 2010 the number of households in Brisbane rose by 35 per cent, but peak electricity demand rose over the same period by 104 per cent.

“This means that capacity is being built and capital spent that may be used only a handful of times each year," the draft white paper says.

“It is estimated that 25 per cent of retail electricity costs are derived from peak events that occur over a period of less than 40 hours per year – clearly this is an inefficient utilisation of capital with resulting consequences for energy bills."

Curbing the growth of peak demand is a highly cost-effective way to reduce the need for future investment and curb the growth of average electricity bills.

The way to do that is to replace inefficient uniform retail pricing with time-of-day metering and prices that reflect the actual cost imposed by consumers on the system. This should be accompanied by an intensive public education campaign to show people how to cut their peak-hour energy bills without destroying their living standards.

None of this may seem like attractive politics now, but it could be better than the alternative, particularly for the Prime Minister. History tells us that the blame for unpopular federal government decisions that are implemented by the states tends to stick to the state politicians.

The NSW and Queensland governments, in turn, might decide to separate themselves from the tough decisions ahead by fully privatising their electricity industries.

This, too, is advocated by the authors of the draft white paper. And it certainly would smooth the way for both the large-scale investment and the reforms now unavoidably on the industry’s agenda. It would also free up funds for capital investment by the O’Farrell government in NSW and the soon-to-be Newman government in Queensland.

The federal government’s role would be to help facilitate the change while promoting the development of the national market. Most importantly, it would override state protectionism and ensure adequate investment in interstate transmission capacity.

Garnaut argues that, for want of adequate investment in these interstate connections, the national electricity market still operates as a collection of distinct regional markets.

As well as promoting competition, investment in interstate connections would be important to the renewable energy generators. That, as Garnaut explains, is because they would have more freedom to locate where their costs are lowest.

It also would allow more diversity in the use of solar and wind resources, and it would reduce the need to maintain coal-burning stations.

It should be part of a reform package that includes the phasing out of renewable energy targets which are now an expensive and superfluous addition to the Gillard government’s emissions trading scheme.